With interest rates remaining at all time lows, and for the first time in several years not rising temporarily in the fall, some consumers are starting to wonder whether or not a five year fixed mortgage is the best option especially given recent news of payout penalty nightmares. As a result, we have selected our top three non five-year mortgage products for the fall market.
3 year Fixed
When asked recently what the best variable rate on the market was, we replied with the three-year fixed. Why? The three year fixed is currently priced very close to variable rate mortgages but provides three years of rate protection, making it a great alternative to a variable rate, especially for those with low risk tolerance. One thing to watch out for however is that it may have a higher penalty than a variable rate mortgage, so make sure it is a mortgage you are willing to keep for the full term.
Variable Rate Mortgage
The variable rate mortgage is making a comeback. With variable discounts as high as .70%, they are once again priced significantly lower than the five-year fixed rate. In historical terms, when the price of a variable rate is this much lower than a five-year fixed, the variable will outperform. One other major benefit – variable rate mortgages only have a three-month interest penalty, making them cheaper to get out of than a fixed rate mortgage.
The Hybrid
Our favorite product for those who aren’t necessarily ready to let it ride on a variable rate mortgage is the hybrid. Part fixed, part variable; it is the best of both worlds. It lets you hedge the risk of a variable rate mortgage with the security of a fixed, and gives you an average rate of around 2.75%. Furthermore, you can choose to pay down either the fixed or the variable rate portion independently, which gives you a significant amount of flexibility.
Regardless of the mortgage you choose, the decision should be based on your risk tolerance and your financial personality type. For those who have a low risk tolerance a fixed rate mortgage will allow you to sleep better at night. For those who like to live a little, a variable rate will give you a potential payoff with the option to lock in if rates start to rise. If you just can’t decide, the hybrid mortgage is the way to go.
One other thing to keep in mind – if you are in a relationship where one partner is more risk averse than the other, it is usually a good idea to make decisions that are less risky, as adverse financial emotions in a relationship can destroy a relationship. Choosing the right mortgage for a couple is about finding common ground and making sure both people can sleep at night if rates start to rise.
